Mortgage tips to gain ‘independence’ from a lender

DEAR MR. MYERS: Early this year, I took out a mortgage for $150,000 at about 4 percent for 30 years. Now I have received a letter from a company that says it will convert my current repayment schedule into a biweekly loan that would cut several years off the life of my mortgage and save me several thousands of dollars in interest. This seems like a great deal, because it would let me retire debt-free more than three years earlier and save me a bunch of money even after I would pay the company’s one-time set-up fee of $700. Is this offer legitimate, or just a scam?

ANSWER: Some companies that offer to convert a once-a-month repayment plan to a biweekly format are legit, but others are operated by con artists who will deposit a borrower’s check in their private account and never forward a payment to the original lender. Homeowners who fall victim to such scams can quickly wind up in foreclosure because the original lender isn’t being paid.

With July 4th here, I’m devoting this entire column to answering questions from readers who would like to pay their mortgage off early and thus gain independence from their lender.

Q: How can making one-half of my required monthly payments once every two weeks instead of once per month save me money?

A: It will save money because there are 52 weeks in a calendar year. Most lenders send out mortgage bills only once per month. By instead paying half the amount every two weeks, you will make the equivalent of 13 monthly payments a year, rather than 12.

Those savings steadily add up. On a new $150,000 mortgage at today’s fixed-interest rate of about 3.6 percent, opting for biweekly repayment would trim a bit more than three years off the life of a typical 30-year repayment schedule and save more than $30,000 in long-term finance charges. That’s because the loan’s principal amount would be paid off much faster.

Q: What about choosing a 15-year amortization plan instead?

A: Fifteen-year loans are a great way to save more, provided you can handle the higher monthly payments that such “quick pay” mortgages involve.

Ironically, many prospective borrowers don’t even consider a money-saving 15-year loan because they mistakenly think that their monthly payments would be twice that of a 30-year schedule. In reality, payments on a 15-year loan are only about 40 percent higher, because the principal amount is paid in half the usual time and rates on 15-year loans are about one-half of a point lower than rates on 30-year mortgages.

Let’s compare the results for two hypothetical borrowers, each one seeking a $150,000 loan. The first gets a 30-year fixed at the current rate of about 3.6 percent. His monthly payment for principal and interest would be $682, and he’ll pay $95,508 in finance charges before the mortgage is retired three decades from now.

The second borrower opts for a 15-year loan instead. She’ll pay 3 percent in interest because rates on quick-pay loans are always lower, resulting in a monthly payment of $1,036.

Though the second borrower’s monthly payments will be 40 percent higher, she’ll pay $36,457 in finance charges over the next 15 years. That’s $59,051 less than she’d pay if she went the 30-year route, and she’ll own her home free and clear in half the usual time.

Q: I like the idea of paying my loan off early, but I don’t want to lock myself into the higher payments that a 15-year mortgage would entail. What if I simply add $50 or so directly to my outstanding loan balance whenever I have some extra cash?

A: That’s probably the best way to pay your loan off ahead of schedule and save thousands in interest charges, provided you make such “principal only” payments as often as you can.

One trick would be to simply add an amount that is equivalent to 1/12 of your regular payment on a 30-year loan, or roughly $57 extra each month on a new $150,000 mortgage. Doing so would essentially allow you to make 13 payments over the course of the year, much like a biweekly repayment schedule, and save you about $30,000 in long-term finance charges because the debt would be repaid more than three years sooner.

David W. Myers’ column is distributed by Cowles Syndicate Inc.